Chapter 5 - Activity-Based Costing

Chapter 5 - Activity-Based Costing - 5-1 MGT223...

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Chapter Five MGT223 Activity-Based Costing: A Tool to Aid Decision Making Activity Based Costing (ABC) ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore affect fixed as well as variable costs. ABC is a good supplement to our traditional cost system Learning Objective 1 Explain activity Explain activity -based based costing and how it differs costing and how it differs from a traditional costing from a traditional costing system. system.
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How Costs are Treated Under Activity–Based Costing ABC differs from traditional cost accounting in four ways. Manufacturing costs Nonmanufacturing costs n ABC assigns types of costs to products. Traditional product costing ABC product costing How Costs are Treated Under Activity–Based Costing o ABC does not assign all manufacturing costs to products. Manufacturing costs Nonmanufacturing costs Traditional product costing ABC product costing All M o s t, b u t n t a ll Some ABC differs from traditional cost accounting in four ways. How Costs are Treated Under Activity–Based Costing Plantwide Overhead Rate Departmental Overhead Rates Activity–Based Costing Number of cost pools Level of complexity p ABC uses more . ABC differs from traditional cost accounting in four ways.
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How Costs are Treated Under Activity–Based Costing p ABC uses more cost pools. Each ABC cost pool has its own unique measure of activity. ABC differs from traditional cost accounting in four ways. Traditional cost systems usually rely on volume measures such as direct labour hours and/or machine hours to allocate all overhead costs to products. How Costs are Treated Under Activity–Based Costing Traditional Costing The predetermined overhead rate is based on budgeted activity. This results in applying all overhead costs including unused, or idle capacity costs to products. Traditional Costing The predetermined overhead rate is based on budgeted activity. This results in applying all overhead costs including unused, or idle capacity costs to products. ABC Products are charged for the costs of capacity they use – not for the costs of capacity they don’t use. Unused capacity costs are treated as period expenses. ABC Products are charged for the costs of capacity they use – not for the costs of capacity they don’t use. Unused capacity period expenses. q ABC bases level of activity on . ABC differs from traditional cost accounting in four ways. Activity An event that causes the consumption of overhead resources. Activity Cost Pool A “cost bucket” in which costs related to a particular activity measure are accumulated. $ $ $ $ $ $ How Costs are Treated Under Activity–Based Costing
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Activity Measure Activity Measure An allocation base in an activity -based costing system.
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This note was uploaded on 10/10/2011 for the course ECON 110 taught by Professor Boliy during the Spring '11 term at Aachen University of Applied Sciences.

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Chapter 5 - Activity-Based Costing - 5-1 MGT223...

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